The United Kingdom has long been a favoured destination for property investment, attracting not only its own citizens but also expats and foreigners seeking stable returns in the UK’s property market. However, it comes with its own set of tax considerations that can significantly impact your financial returns.
In this article, we will delve into the tax-related aspects of UK property investment for expats and foreigners in detail.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is a tax levied on the purchase of land and property in England and Northern Ireland. It is a one-time tax paid by the buyer and is calculated based on the purchase price or market value of the property being acquired.
The rates and thresholds for SDLT can vary depending on the value and nature of the property, with higher rates for additional investment properties. The applicable SDLT rates for expats and foreign property investors are as outlined below:
|
Purchase Price/Lease Premium/Transfer Value |
Non-UK Residents |
|
|---|---|---|
|
SDLT Rate for a single property |
Additional Rate |
|
|
Up to £250,000 |
2% |
5% |
|
£250,001 to £925,000 |
7% |
10% |
|
£925,001 to £1.5 million |
12% |
15% |
|
Over £1.5 million |
14% |
17% |
The individual must have non-UK resident status, and the property’s purchase price must be £40,000 or higher for the above SDLT rates to apply.
SDLT For First-Time Buyers
You qualify as a first-Time Buyer if you have never previously owned a freehold or leasehold interest in any residential property, whether in the UK or elsewhere worldwide, and if your intention is to establish the property as your sole and primary residence.
It’s crucial to understand that this relief is eligible when the total cost of the residential property does not exceed £625,000.
| Purchase Price/Lease Premium/Transfer Value | Non-UK Residents |
|---|---|
|
Up to £425,000 |
2% |
|
£425,001 to £625,000 |
7% |
Non-Resident Landlord Scheme
If you earn rental income from your UK property, you will be liable for UK income tax. The Non-Resident Landlord (NRL) Scheme is a tax initiative implemented by the UK government to ensure the efficient collection of income tax on rental earnings from properties located in the UK when the property owners are not considered UK residents for tax purposes.
Under this scheme, various entities, including individuals, partnerships, companies, and trustees, are required to register with HM Revenue and Customs (HMRC) to declare their rental income and comply with their tax obligations.
The responsibility for deducting basic rate income tax from rental income lies with either letting agents or tenants. However, non-resident landlords have the option to apply for gross rent payments if they meet specific criteria. This means that rental income can be remitted to the landlord without the deduction of tax.
To facilitate the process of receiving untaxed rental income, non-resident landlords are required to complete the appropriate form corresponding to their status: the NRL1 Form for individuals, the NRL2 Form for companies, and the NRL3 Form for trustees.
Income Tax
If you are a foreign individual or an expatriate generating income from property rentals in the UK, you are liable to pay income tax on the profits earned from your rental properties. The income tax rates applicable are:
|
For 2022/23 |
For 2023/24 |
Tax Rate |
|---|---|---|
|
First £12,570 (Personal Allowance) |
First £12,570 (Personal Allowance) |
0% |
|
£12,571 to £50,270 |
£12,571 to £50,270 |
20% |
|
£50,271 to £150,000 |
£50,271 to £125,140 |
40% |
|
Above £150,000 |
Above £125,140 |
45% |
Personal Allowance
You will receive a Personal Allowance of £12,570, which represents the threshold above which you must pay income tax.
However, if your net adjusted income exceeds £100,000, your personal allowance will be reduced by £1 for every £2 of net income above £100,000.
However, it’s important to note that non-UK residents will only be eligible for the personal allowance if any of the following conditions apply to them:
1. You’re a British citizen.
2. You’re a citizen of a European Economic Area (EEA) country.
3. You’ve worked for the UK government at any time during the tax year.
You may also be eligible if the personal allowance is included in the double-taxation agreement between the UK and the country in which you reside.
Section 24 Interest Relief Restriction
Up until the 2016/17 tax year, landlords were allowed to deduct mortgage interest from the gross rent to calculate their taxable net rental income. However, commencing with the 2020/21 tax year, the deduction of mortgage interest as an expense is no longer permitted.
This shift was introduced gradually, starting in the 2016/17 tax year, as part of the Interest Rate Relief Restriction. Instead, a 20% tax credit is applied to lower the tax obligation.
Corporation Tax
Non-resident companies are subject to UK Corporation Tax on the profits derived from their UK property holdings, which includes rental income and any capital gains realised upon the sale of UK properties.
The corporation tax rates applicable are:
|
Profits |
Corporation Tax |
|---|---|
|
Up to £50,000 |
19% tax on all its profits |
|
Between £50,000 and £250,000 |
19% tax on the first £50,000 |
|
Greater than £250,000 |
25% tax on all its profits |
Capital Gains Tax
Capital Gains Tax (CGT) is applicable when selling a UK property, and it is calculated based on the profit generated from the sale. The implementation of CGT on non-resident individuals for direct sales of UK residential property began on 6 April 2015, and it was subsequently expanded to include indirect sales of UK property or land starting on 6 April 2019.
|
Nature of Property |
Basic Rate Taxpayer |
Higher/Additional Rate Taxpayer |
|---|---|---|
|
Residential properties (18% or 28%) |
18% on the unused amount of your basic rate band and 28% on the remaining amount |
28% on the whole gain |
|
Commercial properties (10% or 20%) |
10% on the unused amount of your basic rate band and 20% on the remaining amount |
20% on the whole gain |
Generally, the taxable gain is determined by comparing the current market value of the property with its initial cost. For the properties owned before 6 April 2015, there are three methods to calculate the taxable gain, namely, default rebasing method, time-apportionment method and retrospective computation method.
Read our Guide to Non-Resident Capital Gains Tax (NRCGT) in the UK to know more about CGT calculation.
CGT Allowance
Capital Gains of up to £6,000 per year (for 2023/24) and £3,000 (from 2024/25 onwards) are exempt from tax for non-resident individuals. However, non-domiciled UK residents who opt for the remittance basis are not eligible for the annual exemption.
CGT for Non-Resident Companies
Starting from 6 April 2019, all non-resident companies became liable for Corporation Tax rather than Capital Gains Tax for profits generated from the sale of UK property or land. As such, there is no CGT allowance for non-resident companies.
For non-resident companies that were not previously subject to UK Non-resident Capital Gains Tax (NRCGT), their gain is calculated by comparing the current market value of the asset with its value as of April 2015.
Inheritance Tax
Inheritance Tax (IHT) is a tax levied on the estate of a deceased individual. Prior to April 2017, non-UK domiciled individuals could avoid Inheritance Tax (IHT) on UK residential properties by using offshore entities as holding structures.
However, the reforms implemented in April 2017 made it obligatory for non-domiciled individuals to pay IHT on all UK residential properties, including those held indirectly through offshore structures.
Therefore, non-resident individuals who hold residential properties through enveloped structures are subject to a 40% IHT charge upon their passing, with this rule coming into effect in April 2017.
Annual Tax on Enveloped Dwellings
If you are a non-resident company that owns residential property in the UK valued at more than £500,000, you could potentially be liable for the Annual Tax on Enveloped Dwellings (ATED).
This tax is an annual tax obligation, and it requires the submission of an annual ATED return by 30 April each year. The chargeable amounts for 2023/24 are:
|
Property Value |
Annual Charge |
|---|---|
|
£500,001 to £1,000,000 |
£4,150 |
|
£1,000,001 to £2,000,000 |
£8,450 |
|
£2,000,001 to £5,000,000 |
£28,650 |
|
£5,000,001 to £10,000,000 |
£67,050 |
|
£10,000,001 to £20,000,000 |
£134,550 |
|
More than £20,000,000 |
£269,450 |
Conclusion
Investing in UK property as an expat or foreign individual can be financially rewarding, but it is crucial to understand and address the tax considerations associated with such investments.
By carefully planning your ownership structure, leveraging tax relief opportunities, and seeking professional advice, you can optimise your tax position and make informed investment decisions that align with your financial goals in the UK property market.
